If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Service Corporation International (NYSE:SCI), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Service Corporation International, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.057 = US$830m ÷ (US$15b - US$767m) (Based on the trailing twelve months to March 2023).
Therefore, Service Corporation International has an ROCE of 5.7%. In absolute terms, that's a low return but it's around the Consumer Services industry average of 6.8%.
See our latest analysis for Service Corporation International
Above you can see how the current ROCE for Service Corporation International compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Service Corporation International here for free.
What Can We Tell From Service Corporation International's ROCE Trend?
There are better returns on capital out there than what we're seeing at Service Corporation International. The company has employed 23% more capital in the last five years, and the returns on that capital have remained stable at 5.7%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
What We Can Learn From Service Corporation International's ROCE
As we've seen above, Service Corporation International's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 98% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
One final note, you should learn about the 2 warning signs we've spotted with Service Corporation International (including 1 which is a bit concerning) .